How Many Securities Should You Have?

I’ve been asked this question before and my general rule of thumb is 20. I touched on this in a January, 2007 post about diversification however I’ll just rehash it a little bit. I think that if you own over 20 stocks you run the risk of becoming too diversified. If you’re too diversified you basically become the market and if that’s the case why waste the time and commission fees buying individual stocks? Simply buy some low MER index funds and get it over with, because if you diversify too much you’re going to mimic the index anyways.

There are of course exceptions, for example if you’re pursuing a high risk strategy such as penny gold stocks it would probably be wise to create a basket of these high risk stocks and hope for a few big winners. Additionally, if your portfolio is under $70,000 I don’t think that you should be aiming to hold 20 stocks. I believe that if you can’t commit a minimum of 2.5% to 3% of your portfolio to a stock you probably shouldn’t buy it. I will often buy a half position ie- 2.5 to 3% of a stock and if it increases and grows into my target 4 to 8% of my portfolio great! but if not I will wait and average down to increase the weighting.

Best of The Blogs

I thought that I’d use this post for some shameless self promotion as Middle Class Millionaire has recently been nominated as one of the "Best of the Blogs" by The Globe and Mail. I am definitely in good company as fellow bloggers Canadian Capitalist, Four Pillars, Dividend Guy, and Million Dollar Journey were also on the list.

Does 1% Really Matter?

When it comes to investing and your portfolio does 1% really matter? If you are paying an MER of 2.5% instead of 1.5% is it a big deal? What about if your portfolio returns 7% instead of 9%?

If your investment horizon is between 1 and 2 years than a couple percent really doesn’t matter. Your portfolio won’t be affected in any meaningfully way. However, if you are a long term investor 1 or 2% certainly does matter and will have a huge impact on your total portfolio return. I created the below chart to illustrates just how much difference 1 or 2 percent can make. The chart makes the following assumptions:

1. Initial investment of $10,000 in year 1.
2. No additional contributions.
3. Interest compounded annually.
4. All interest is reinvested.



So although it may seem petty to be wasting time and squabbling over a one or two percent difference it could mean a difference of hundreds of thousands of dollars in retirement.

Portfolio Update as of May 1, 2008

-up 3.1% from last month
-up 3.5% in 2008
-CDN 66%
-U.S. 30.5%
-International 3.5%

TRP - 3.99%
CSH.UN - 4.03%
GWO - 4.25%
PFE - 4.39%
POW - 3.80%
WAG - 3.22%
L - 2.64%
UNS - 1.95%
GZ - 2.82%
TD - 12.61%
EIT.UN - 2.68%
JNJ - 5.82%
MMM - 3.38%
C - 3.57%
ATD.B - 2.59%
BCE - 5.26%
IIC - 2.65%
O'Shaughnessy’s Global Fund - 3.43%
American Growth Fund - 0.89%
CDN Value Fund - 3.00%
Small Cap Growth Fund - 3.71%
Chou Associates Fund - 9.14%
Money Market Fund - 10.20%

There were no changes to the composition of my portfolio last month and I don’t anticipate any major changes this month either. However, I am taking a close look at BPT.UN and CU and may initiate a position in one of those names this month.

Moving to the Country…The Finances

As promised here is a little update on the finances of our move to the country. As you’ll see below this move is being done solely for lifestyle reasons and is certainly not financial motivated in any way.

My wife is on maternity leave for the next 2 months so the move will have no impact on what she brings in (in the short term). However, she works in a field that is in demand everywhere and she doesn’t anticipate having any trouble finding work once her maternity leave is up. However, it’s a different story for me as I currently work in a specific area of technology that doesn’t exist up north. Luckily for me I do have some other skills to bring to the table and was able to get a part-job in Information Systems for a government organization. My new hourly wage will be considerably below what I currently make and accounting for the lower wage and reduced hours I will probably be taking around a 65 to 70% pay cut. However, for what it’s worth my actual take home pay will probably be about 40% of my current take home due to less taxes, benefits and pension contributions.

On the plus side I’m still under thirty, live where I want, in the house that I want, and for all intents and purposes am semi-retired.

Thinking about Investing? Start Now

The below chart illustrates the importance of investing early and the power of compounding interest. When it comes to investing time really is on your side.

Case 1:
• $2,000 invested annually in years 1 to 5
• No contributions after year 5
• Assumed rate of return of 10%
• Interest compounded annually.
• All interest is reinvested.
• Total invested $10,000

Case 2:
• No money invested in years 1 to 10
• $2,000 invested annually in years 11 to 40
• Assumed rate of return of 10%
• Interest compounded annually.
• All interest is reinvested.
• Total invested $60,000



You have probably seen similar charts on the front of mutual advertisements and although I’m not a huge proponent of mutual funds I think the underlying message is valid---The earlier you start investing the better.

Boralex Power – BPT.UN

ABOUT BORALEX
Created in February 2002, Boralex Power Income Fund (the “Fund”) is an unincorporated open-ended trust that indirectly owns ten power generating stations with a total installed capacity of 190.0 MW. Eight of these power stations are located in Quebec (Canada) and two are in the State of New York (United States).

•The Fund owns seven hydroelectric power stations – five in Quebec and two in the United States – with a total installed capacity of 96.4 MW.
•In Quebec, the Fund owns two wood residue-fired facilities – a thermal power station and a cogeneration plant – with a total installed capacity of 62.6 MW. The cogeneration plant also produces 1,780,000 thousand pounds of steam annually.
•The Fund also owns the only natural gas-fired cogeneration plant in Quebec, which has an installed capacity of 31.0 MW and approximately 862,000 thousand pounds of steam annually.

FINANCIAL HIGHLIGHTS
-14% Yield
-expected 2008 payout ratio of 95%
-trading at approximately 30% below it’s book value.
-estimated 2008 PE – 11.5X
-estimated 2009 PE – 11.6X
-Trading at 6.5X cash flow.
-Current Ratio of 2.11
-TDWaterhouse rates them a high risk HOLD and have a one year target price of $6
-DBRS Stability Rating of STA-2(low)
-S&P Stability Rating of SR-2/stable
-DBRS Long-Term Debt Rating of BBB
-Have long term power purchase agreements at all 10 of their locations with contracts expiring between 2012 and 2035.
-Distributions are tax friendly. Approximately 48% of the distribution is return of capital, 31% dividend income, 18% taxable income, 3% capital gains.
-They are a small player in the power generation industry (225 million market cap) and trading below their book value. If they are able to resolve some of their biomass and hydrology issues they would become an attractive takeover candidate.

RISKS
-2007 was a very rough year for BPT.UN. The fund has suffered a number of setbacks in addition to the general malaise of the power generation industry. As a result they have seen their unit price plummeted from a 52 week high of about $11 to it’s current price of around $5.
-In order to increase their financial flexibility and maintain their emergency cash reserves the distribution was recently cut by 22% from 90 cents a unit to 70 cents a unit.
-The weak results in 2007 were primarily caused by the following 3 issues: a weakening U.S dollar, problems sourcing a cheap supply of biomass fuel and below average hydrology. How will these issues affect their results in 2008?

WEAK US DOLLAR
I believe that the weakening of the U.S dollar will continue in 2008 however, I’m not anticipating as large of a move as in 2007.

BIOMASS SUPPLY
Two of their power stations are fueled using wood residue from the forestry industry. As the forestry industry has been devastated in Quebec it’s becoming increasingly difficult, and expensive to obtain an affordable and reliable supply of fuel.

HYDROLOGY
This is anyone’s guess. Like the weather we won’t know until it happens. It may be below average again in 2008 or it may be above however, over time it should revert to the mean.

[As always please do your own research and consult your own financial advisor before making any decisions.]